lessons learned: nam theun 2 hydroelectric project...

Lessons Learned: Nam Theun 2 Hydroelectric Project (NT2)

Water Week 2007Mohinder Gulati

Lead Energy Specialist, World Bank

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Presentation Structure

• Defining Elements of NT2• Public-Private Partnership• Avoiding the Resource Curse• Innovative Approaches in Safeguards• Lessons Learned

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Defining Elements of NT2 (1)• First large dam project after endorsement of new

Water Resources Sector Strategy (2003);• First IDA guarantee to support hydro development;• Largest: foreign investment in Lao PDR, private sector

hydro project financing, cross-border power project, and one of the largest internationally-financed IPPs in Asia since the 1997 financial crisis;

• Utilized creative financing of GOL’s equity to boost its returns from investment in the project;

• Invoked all ten Bank safeguards: Legal obligations on E&S embedded in the Concession Agreement; and

► Preparation involved getting the country ready for the project as much as preparing the project for the country, and getting the Bank ready for the project.

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Defining Elements of NT2 (2)NT2 is also large, complex, and highly visible:• Base project cost = US$1.25 billion plus a $200 mm contingency;• Triples Lao power exports, adding 995 MW (total=1070 MW) of

power exports to Thailand;• Will generate US$1.95 billion (nominal) for GOL over 25 years;• Involves large number of entities engaged in preparation and

implementation, with complex, multi-layer monitoring and supervision arrangements; and

• Comprises part of a broader program, for strengthening Government capacity in environmental and social impacts (LEnS), financial management (FMCBC), public expenditure management, and complementary projects in rural electrification and rural development.

►Attracts continuing attention of a broad range of stakeholders, magnifying the importance of transparency and communications.

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NT2 preparation: A new Business Approach

• Decision Framework: strong partnership with government on macro-economic reforms, poverty reduction, and sustainable growth.

• Transparent and intense project-level due diligence: engagement with all stakeholders.

• Communication, Consultation, Participation, and Disclosure: local and international, independent external oversight.

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Country Context and Background (1)• Lao PDR is a small, landlocked country with a weak

economy, low Human Development Indicators, growing but low human and technical capacity, and low industrialization:

GDP of US$2.9 billion and US$440 per capita GNI;Infant mortality of 65 per 1,000 live births;Literacy of 69% (% of population age 15+);Access to improved water source: 51% of population.

• Primary sources of growth are hydropower development and mining.

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Country Context and Background (2)• Large hydro potential (about 18,000MW technically

exploitable);• Situated geographically near a

hungry regional energy market:

• To ensure maximum benefits for the people of Lao PDR, it is critical to develop hydro potential in an environmentally sustainable and socially responsible manner.

Thailand and Vietnam (creditworthy and with fast-growing electricity markets) each face annual capacity expansion needs on the order of 2000 MW;

NT2 Dam Site

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NT2 Project Overview• NT2 provides substantial benefits:

revenue flows to reduce poverty and improve environmental management;conservation of the Nakai Nam Theun National Protected Area -- the NT2 watershed (3,500 km2) -- and wildlife corridors (700 km2);

• But it also has potentially negative impacts on all three project zones for which mitigation and compensation programs have been designed:

Resettlement of 6,200 people (largely ethnic minorities) on the Nakai Plateau;impacts on livelihoods of ca. 70,000 people downstream of the NT and XBF rivers and their tributaries.

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NT2 Project Schematic• Nakai dam (39 m high) and

coffer dams;• Intake and underground

works;• Power station (1070 MW);• Regulating pond/dam;• Downstream channel (27 km);

• Access roads (62 km of new public roads and upgrading of 82 km);

• Transmission lines (500 kV: 138 km in Lao through Mekong crossing and 159 km in Thailand; 115 kV: 29 km)

Source: graphics courtesy of NTPC

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NT2 Project Status• Project implementation began in mid-2005;

construction is largely on schedule with some minor delays.

• At the same time, considerable activities are under way to mitigate environmental and social impacts, including resettlement and livelihood restoration. While notable progress has been made, but much remains to be done.

• Impoundment of the reservoir is expected to begin in mid-2008, and commercial operations are slated to commence in late 2009.

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NT2: A Timeline OverviewEarly Phase (1994-1997)

Hiatus and Change(1997-2001)

New Business Approach (2001-2005)

Broader Context

Evolving Understanding on Safeguards

NT2 Milestones

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Timeline: Broader Context

NT2: Early Phase (1994-1997)

NT2: Hiatus and Change(1997-2001)

NT2: New Business Approach (2001-2005)

• Change in Thai leadership (paves way for reawakening of interest in NT2)

• Bank releases response to WCD report

• Water Resources Sector Strategy and Infrastructure Action Plan endorsed

• Ongoing intense debates with international civilsociety, but with greater efforts to keep dialogue constructive

• Dramatic Bank transformations through reorganizations

• QACU revamped with mandate of proactive approach on safeguards-related corporate risk management

• World Commission on Dams Report released

• Intense global debate on dams

• Increased Bank risk aversion on dams

• Safeguards evolving to distinguish between mandatory and advisory elements

• Inspection Panel (1993) continued to strengthen safeguards

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• Changes in 2005 aim to improve/enhance policy by extending, rationalizing and simplifying the 2002 provisions.

• Review (2000) leads to revisions (2001) encouraging greater transparency and accountability.

• Policy implementation strengthened following staff reviews in 1995 and 1997.

Disclosure

• Revised 2004• Revised 2001•OP/BP 7.60 (1994)Projects in Disputed Areas

• Revised 2004• Revised 2001• OP/BP 7.50 (1994)Projects on Int’l Waterways

• Revised 2001• OP/BP 4.37 (1996)Safety of Dams

• OP/BP 4.36 (2002)• Revised 2004

• OP/GP 4.36 (1993)Forests

• Revised 2004• OP/BP 4.12 (2001)• Resettlement directives (1980s);

• OD 4.30 (1990, 1993)

Involuntary resettlement

• OP/BP 4.11 (2006)• OPN 11.03 (1986)Physical Cultural Resources

• OP/BP 4.10 (2005)• OD 4.20 (1991)Indigenous Peoples

• Revised 2004• Revised 1998• Early instructions (2001)• OP 4.09 (1996)

Pest Management

• Revised 2004• Revised 2001• OP/BP 4.04 (1995)Natural Habitats

• Revised 2004• OP/B.P 4.01 (1999)• Early instructions provided in 1990/91

Environmental Assessment

Safeguards EvolutionEarly Phase (1994-1997)



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Timeline: NT2 Milestones

Early Phase (1994-1997)



• NT2 Decision Framework agreed with GOL, and project preparation regains momentum

• GOL hosts major NT2 public symposium

• CA and PPA signed• GOL/NTPC host series of international stakeholder workshops

• NT2 approved by the Board

• Asian economic crisis stifles demand for energy EGAT (purchaser) shelves NT2 in light of sharply reduces demand projections

• 2 of 3 Thai partners in private consortium withdraw

• Hiatus ensues on project preparation

• Formal Bank engagement starts

• Major Technical Mission• POE, DSRP and IAG convened

• GOL holds 3 National Workshops on NT2

• NT2 project Preparation reached advanced stage

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Global Financial Stake in NT2• WB (US$62 million); MIGA (US$42 million); ADB

(US$110 million)• EIB and NIB (about US$85 million)• European ECA’s (US$200 million)• French Development Agencies (US$60 million)• Nine International Dollar Banks (US$500 million)• Seven Thai Commercial Banks (US$500 million

equivalent)• Thai Exim (US$30 million)• Private Equity (US$260 million), plus contingent equity

(US$100 million)

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Using IDA PRG to Mobilize Private Debt Financing

NTPC (SPV)

GOLEquity

PrivateEquity

EGAT(primary offtaker)

Government of Lao PDR(as concessionaire)

THB & non-WBGuaranteed

US$ Commercial Debt

WB GuaranteedUS$ Debt

Limited GOL PerformanceObligations• Permits, Consents• Change in Law• Political FM• Termination of the CA

PPAPPA CACA

CTACTA

IDAIDAGuaranteeGuaranteeAgreementAgreement

SHASHA

IDAIDAIndemnityIndemnityAgreementAgreement

IDAIDAProjectProjectAgreementAgreement

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Contractual Structure

LHSE EGCOEDFI

Nam Theun 2 Power Company

Shareholders Agreement & Equity

Head Construction Contract

EM1 & EM2 CW1, CW2, &

CW3

Construction Sub-Contracts

GOL EGAT EDL

EGATPPA

EDLPPA

Concession Agreement

Technical Services and Management Services

Agreements

GOL Undertaking

ITD

ECAs

MIGA

Loans

PRG / PRI

ESCO Multilateral & Bilateral Agencies

US$ Banks

World Bank

THB Banks

EIB

ADB

GOL Equity Funding

AFD

EDF

Shareholders’ Agreement

Coverage

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Allocation of Key Risks*

*Based on a simple analysis of key Project Agreements.

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NT2 Revenue Management Arrangements

• Eligible expenditures should be based on NSEDP (2006-2010) and its successors are clearly determined

• Budget classification system effectively identifies eligible expenditures and system for tracking/reporting in place

• Baseline allocation to eligible programs established and “additionality” of NT2 resources determined one year prior to resources flowing into the system

• Government start publishing budget execution reports, financial statements, and summaries of internal audit reports

• Monitoring and evaluation tools in place• Strengthen external audit capacity

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Implementation of NT2 RMA

• Government designed with support from the World Bank a comprehensive Public Expenditure Management Strengthening Program (PEMSP) which is the main vehicle for implementation of NT2 RMA

• PEMSP focuses on:Budget Planning and ExecutionBudget Reporting and MonitoringImproving central-local fiscal relations frameworkStrengthening external and internal audit functions

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Progress with PEMSP Implementation

• Program started implementation from 2005 – led by a high level Steering Committee and an Implementation Committee

• Government passed a new organic Budget Law which aims to: (i) centralize national treasury; (ii) centralize customs and tax administration; and (iii) implement a new intergovernmental fiscal transfer system

• Progress on the nuts-and-bolts of the public finance management system is broadly on track

Revision of chart of accounts, improvements in budget planning process and execution system, improvements in reporting and external audit

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Revenue Management: Emerging Conclusions

• Client requires a lot of face time as they move towards cautious implementation of reforms

• Improving targeting and amount of donor support towards implementation of PEMSP and revised Budget Law

• Need to strengthening baseline systems and procedures which are very weak and require significant and sustained resources

• Have to improve implementation capacity and manage key personnel risk

• Strengthen coordination mechanisms within Government which are at present weak

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What Worked Well?• Significant leveraging of multilateral guarantee mechanisms is

possible – even in challenging environments; key factors include: reputable players, existing regional understandings, and creditworthy off-taker.

• Clearly defining roles and responsibilities of the Government and Sponsors (via Concession Agreement in case of NT2 ) should be done early on, with sufficient detail, and ideally with Bank participation.

• Establishing a Decision Framework – with detailed expectations but sufficient flexibility in defined areas – is a constructive way to reach agreement with Government on broad principles of Bank engagement

• Innovative financing of Government’s equity increases overall returns to Government.

• Communications should aim at transparency, balance, and clarity of messages. Information needs to be up-to-date, meaningful to the audience, and available through multiple modalities.

• Building trust and credibility, through quality stakeholder engagement over time, contributes to commitments being honored and goals achieved

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What Could We Do Better? (1)• Need to better understand constraints of private sector

partners. Candid exchanges among all partners, early on, should identify constraints and the scope for accommodation. Bank staff well versed in working with private sector should be part of the Team.

• Consider more carefully the balance between the Bank’s financing role and the policy leverage the Bank exercises, as this leverage brings both advantages and costs to the borrower and sponsors. Need to overcome perception of the Bank as high-cost, high hassle partner of last resort.

• Optimize number of financial partners by: (i) having a smaller number of participants each taking up a larger share of the financing; or (ii) emulating the “Consortium” approach used in banking deals.

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What Could We Do Better? (2)

• Improve process efficiency. Private sector needs, up-front, more predictable budget and cost estimates for financial and other costs they have to bear (and open-ended commitments pose serious difficulties).

• A two-stage risk management strategy would help signal Bank interest earlier (providing more comfort to Government and Sponsors), through transparent, monitorable goalposts. This strategy would involve: (i) up-front assessment of risks/rewards and the practicality of mitigating risks to an acceptable level, leading to a decision to prepare the project; and (ii) development of a Decision Framework (with detailed yet flexible, measurable targets) to guide preparation.

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What Could We Do Better? (3)

• Consistency of message. Large project teams pose special challenges of coordination regarding communications both within the team and across to partners. Ensure predictability of expectations and avoid perceptions of “shifting goalposts.” Ensure that information flows are timely and digestible.

• Address capacity building early on, in a comprehensive and integral fashion, with measurable indicators. Time-disconnect between need to build capacity and the need to get the preparation job done right within the time constraints of a project schedule.

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Results: Public Private Partnership

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NT2 Project

Area Map

lessons learned: nam theun 2 hydroelectric project...

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